Date first published: 14/08/2018

Key sectors: oil & gas, defence, agriculture

Key risks: policy uncertainty; political stability; foreign policy

On 6 August Saudi Arabia suspended diplomatic ties with Canada, freezing new trade and investment business and stopping the import of wheat and barley. Canada’s ambassador to Saudi Arabia was expelled, the Saudi envoy recalled. Riyadh has also reportedly divested of Canadian cash, bond and equity holdings from its central bank and pension funds. Despite promises to continue delivering between 75,000 and 80,000 barrels per day to Ottawa, the reaction seems a disproportionate response to Canada’s foreign ministry’s calling for the release of Saudi human rights activists. Economic damage from the row will be low overall; 2017 bilateral trade came in slightly over US$4bln, with a significant portion from an arms deal worth US$11.5bln. Canada’s exports to Saudi, including grain and barley, accounted for 0.2 per cent of Canadian exports.

Despite the lack of an economic impact, the rift is significant as it proceeds a wave of unprecedented foreign and domestic policy moves, 14 months after King Salman controversially appointed his 32-year-old son Mohammed bin Salman (MbS) as successor. MbS started by jailing members of the royal family, leveraging about US$100bln in settlements in a high-profile anti-corruption drive. This garnered him favour with the public and enabled a consolidation of power in the top levels of cabinet, making himself the sole face of Saudi policy. He has since lifted the ban on women driving, opened cinemas and allowed public concerts, as well as his progressive economic plan, Saudi Vision 2030. For many, MbS is lauded a reformer, a women’s rights advocator and a trail-blazer for Saudi society.

However, his actions both at home and abroad serve a darker purpose. Aggressive foreign policies, from Qatar to Yemen to Canada, enable the fostering of a domestic nationalism that will be deployed to fend off challenges from Saudi’s conservative hardliners and religious police. Given that Saudi’s median age is around 30 years old, MbS has a captive audience, projecting a youth revolution from the top down. However, his actions warn of a politically reckless leader – cutting off wheat imports in a world that has little to sell will impact the average Saudi. His retaliation at first Sweden in 2015, Germany and now Canada over critiques of Saudi’s poor human rights record, which Riyadh sees as “foreign meddling” in domestic affairs, only served to entrench that image.

The Saudi crown prince seems to have taken heart (and example) from close relations with Trump and the White House’s Middle East Envoy (and Trump’s son-in-law) Jared Kushner. Trump’s patronage has enabled the Saudi ruler to attack both domestic and foreign critics with US backing – noticeably absent has been criticism of the young leader’s decisions from the tweets of the verbose US president. While the damage of the diplomatic fall-out between Canada and Saudi will be low to both sides, the warning can be heard globally. The balance of international power is changing, and MbS wants Saudi to play a pivotal role – no longer a passive exporter of oil and hard-line Islam. Within five years the prince will be king and could stay in power for as many as50 years. This does not bode well if one of the world’s largest foreign investors weaponizes its wealth in an economy that continues to depend on Saudi’s oil.